Question

Explain the shapes of total fixed cost curve and average fixed cost curve. Give one reason each to justify the shape of the two curves.

Answer 1

The Total Fixed Cost (TFC) curve is a horizontal straight line parallel to the X-axis. This is because fixed costs remain constant at all levels of output. Whether the firm produces nothing or large quantities, the total fixed cost, such as rent, salaries of permanent staff, etc., does not change. Hence, the TFC curve shows a flat line indicating the same amount of cost at every level of output.

The Average Fixed Cost (AFC) curve, on the other hand, is downward sloping and takes the shape of a rectangular hyperbola. This is because as output increases, the same fixed cost is spread over more units, reducing the average fixed cost per unit. Although it keeps falling, it never touches the X-axis, because fixed cost can never become zero.